Tax Reform: Equity for Small Tech Firms

While Congress and the Administration concentrate on the upcoming elections, Middle East crises and keeping the government running, expiration of the Bush tax cuts looms as a huge issue for all Americans, especially small businesses.  Currently, business planning is near impossible, as major tax increases could take effect on January 1, 2013.  The potential expiration of these cuts could cause an economic slowdown as consumers and businesses face uncertainty on their 2013 tax bills.  This uncertainty will become more apparent as we move past the elections into the lame duck session.  Something must be done, but for now, the general consensus inside the beltway seems to be the all-too-familiar: “We’ll get to it later.”

Increasingly, we are seeing calls for tax reform as a means to move the country back to fiscal stability.  One of the most common themes of tax reform has been to lower the corporate tax rate, while eliminating “loop holes” or other preferential tax provisions.  Certainly, this sound like a reasonable approach.  However, we must keep in mind that in order to dig ourselves out of our fiscal hole, someone is going to have to pay more, and tax reform is simply a euphemism for “someone will have to pay more.”  Who?  That’s the big question.


Small businesses must remain vigilant.  If Congress decides to lower corporate tax rates in exchange for cutting out “loop holes” and other tax credits/deductions, this does not necessarily benefit small businesses – many of which pay tax at individual rates on pass-through earnings from partnerships, S corporations or LLC’s.  That is, it’s possible for the pass-through entities to lose tax deductions without the benefit of a lower tax rate, because these pass through entities pay tax at individual tax rates, not corporate rates.  What would happen if small tech firms continue paying taxes at the same individual tax rate, but lose deductions and credits such as the section 179 small business expensing and/or the research and experimentation tax credit.  This would mean that these pass-though entities – many of which are small businesses – would be stuck with higher tax costs.


Congressional lawmakers will be forced to make some decisions on the Bush tax cuts after the elections.  A short punt might occur, but we are well past the point where we can continue to kick the can down the road.  So, as Congress and the Administration move to grapple with the fiscal cliff, we will continue to defend the interests of small tech firms.  And, in doing so, we continue to believe that tax reform must promote investments in capital, technology and the workforce.